{"id":159182,"date":"2020-04-27T12:00:02","date_gmt":"2020-04-27T11:00:02","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=159182"},"modified":"2025-01-10T15:12:16","modified_gmt":"2025-01-10T15:12:16","slug":"prophets-of-instability","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2020\/04\/prophets-of-instability\/","title":{"rendered":"Prophets of Instability"},"content":{"rendered":"

How Finance Broke the Modern Corporation<\/em><\/p>\n

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Pixabay<\/p><\/div>\n

17 Mar 2020 – <\/em>What are corporations for? In his 1962 book Capitalism and Freedom<\/em>, Milton Friedman gave a blunt answer: profit. \u201cFew trends could so thoroughly undermine the very foundations of our free society,\u201d he argued, \u201cas the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.\u201d Almost two decades earlier, Karl Polanyi had a different answer. As he wrote in his 1944 book The Great Transformation<\/em>, allowing profit<\/p>\n

to be the sole director of the fate of human beings and their natural environment would result in the demolition of society\u2026. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized\u2026. No society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance as well as its business organization was protected against the ravages of this satanic mill.<\/p><\/blockquote>\n

So who was right? Polanyi asked us to look all around us for the answer, at the innumerable laws, norms, and institutions that limit markets and at the destruction an economy without such limits caused in the past. His main examples were World War I, the Great Depression, and World War II, a chain of events that happened, he argued, because society had failed to contain the demons and dislocations loosed by 19th century industrialism. During American capitalism\u2019s postwar golden age, most of the country\u2019s elites agreed that unfettered markets were ruinous. The head of the US Chamber of Commerce in 1946 insisted that \u201ccollective bargaining is part of the democratic process. I say recognize this fact not only with our lips but with our hearts.\u201d President Dwight Eisenhower boasted of using \u201cevery single force and influence\u201d of government to stabilize the economy and wrote that only the \u201cstupid\u201d sought \u201cto abolish social security, unemployment insurance, and eliminate labor laws and farm programs.\u201d When Friedman started calling corporate social responsibility a cancer eating away at freedom, he sounded so off-the-wall that his remarks appeared to be little more than deliberate provocation\u2014trolling, as the kids say now.<\/p>\n

Then things changed. Starting in the \u201970s, corporate profits began to fall. A dollar of capital that earned an average of 9 percent annually in 1966 earned 4 percent in 1977. American economic dominance began to fade. In 1971, for the first time since 1888, the United States ran a trade deficit with the rest of the world, at $1.3 billion; by 1980, it had approached $20 billion. Policy-makers decided to give laissez-faire a shot. Near the midpoint of his new book, Transaction Man: The Rise of the Deal and the Decline of the American Dream<\/em>, Nicholas Lemann tells a story that helps illustrate this transformation. Robert Reich, the secretary of labor under Bill Clinton\u2014the first Democratic president to occupy the Oval Office in more than a decade\u2014uttered the phrase \u201ccorporate responsibility\u201d in a speech and was summoned to the Treasury Department by Robert Rubin, the former investment banker who ruled over the administration\u2019s economic policy, \u201cfor an in-person chastisement.\u201d By the \u201990s, Friedman had won: Corporations were assigned no responsibility other than to make as much money as possible. With the benefit of hindsight, one might add that perhaps Polanyi had won, too, for in the decades after Reich\u2019s summoning, the economy collapsed, Donald Trump won the White House, and the kinds of calamities that Polanyi warned about began to happen as if on cue.<\/p>\n

L<\/span>emann has been one of our wisest, clearest-thinking, and most learned commentators on American society since he began his journalism career at Washington Monthly<\/em> in the 1970s. His books (The Promised Land<\/em>, The Big Test<\/em>, Redemption<\/em>) all tackle moments of sweeping social transformation, offering compelling studies of the interrelation of ideas and institutions grounded in the experience of ordinary people. Transaction Man<\/em>, which tracks how the United States went from a largely Polanyian society to one defined by ideas like Friedman\u2019s, is his best\u2014and most sweeping\u2014yet.<\/p>\n

Transaction Man<\/em>\u2019s narrative revolves around a concept that, at first glance, seems banal and of little consequence: The control of corporations has become separated from their ownership. In the late 19th century, the big companies that defined Americans\u2019 lives, like Standard Oil, were extensions of the will of the men who founded them. But by the second third of the 20th century, they\u2019d been transformed into massive bureaucracies \u201cowned\u201d by thousands of individual shareholders who possessed no real power to control them at all. Power, instead, belonged to hired managers, executives who understood the role of their companies as being far more than just maximizing profits for shareholders. They might even go so far as to keep the main factory in the community where it was born in order to sustain that community\u2019s economic health. Which is exactly what got the likes of Friedman so mad: What gave them the right? It wasn\u2019t their money, after all.<\/p>\n

To tell this story, Lemann begins with a riveting portrait of Adolf Berle, the first thinker to grasp the significance of this transformation. Berle was born in Boston in 1895, at a time, Lemann observes, when a great transformation unleashed by the Civil War was at its height. A small number of businesses had become so enormous that they rivaled the power of the national government. The best minds of the age conceptualized this change as a threat to the idea of America as a society of free individuals. As Justice John Marshall Harlan explained in a 1911 Supreme Court decision that permitted the breakup of Standard Oil, the nation had rid itself of racial slavery, only to find itself<\/p>\n

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in real danger from another kind of slavery\u2026that would result from aggregations of capital in the hands of a few individuals and corporations controlling, for their own profit and advantage exclusively, the entire business of the country, including the production and sale of the necessities of life.<\/p><\/blockquote>\n

When Harlan wrote this decision, Berle was 16 and in his second year at Harvard. By the age of 23, he\u2019d served as an Army staff officer at the Paris Peace Conference, received his master\u2019s and law degrees, and worked in the Boston office of future Supreme Court justice Louis Brandeis. Then Berle became a Wall Street lawyer, living next door to a settlement house whose founder, the progressive reformer and nurse Lillian Wald, became a mentor.<\/p>\n

These identities were not as contradictory as they might seem. Wall Street was a useful crucible for Berle\u2019s vision of social reform, in which the commanding heights of the economy would be organized to serve human needs first. He was learning something new and important from his work writing up stock and bond offerings: that with the passing of a generation of oligarchs like Cornelius Vanderbilt and John D. Rockefeller, the ownership of corporations was becoming increasingly separated from their control\u2014a fact that, as he studied it, Berle increasingly came to believe could be exploited to make the world a much better place.<\/p>\n

What did the separation of ownership from control mean? In his book The Modern Corporation and Private Property<\/em> (1932), cowritten with the economist Gardiner Means, Berle answered this question in an unforgettable way. Imagine a person who owns a horse: \u201cIf the horse lives, he must feed it. If the horse dies, he must bury it. No such responsibility attaches to a share of stock. The owner is practically powerless through his own efforts to affect the underlying property.\u201d This is what happened at US Steel. At its founding in 1901, it was but the lengthened shadow of two men, Andrew Carnegie and J.P. Morgan. By 1932, its shareholders numbered almost 175,000, with each individual \u201cowner\u201d controlling nothing. Many companies in the United States followed this pattern as robber barons died off and their corporations became bigger and more complex. Seeking outside investment, they took on thousands of stockholders, and ownership and management began to go their separate ways. The result, as Berle pointed out, was that \u201cthe power, the responsibility and the substance which [had] been an integral part of ownership in the past are being transferred to a separate group in whose hands lies control.\u201d<\/p>\n

Berle believed that this development could be used to benefit society as a whole. His very influential acquaintance Franklin D. Roosevelt, the 1932 Democratic presidential nominee, agreed: Since corporate managers\u2019 compensation came in the form of salaries, they could be persuaded to act in socially responsible ways that oligarchs would not. In one of modern liberalism\u2019s most famous speeches, given before the Commonwealth Club of San Francisco, Roosevelt proposed a new \u201ceconomic constitutional order\u201d to restrain business and protect workers that came to include old-age pensions, bank deposit insurance, health and unemployment insurance, and regulations holding financial speculation in check. In short, a New Deal.<\/p>\n

T<\/span>he paradigmatic moment of the new, more humane economy that Berle envisioned came in 1950, when the United Auto Workers and General Motors inked a remarkable settlement giving factory workers automatic quarterly cost-of-living increases, and company-provided health insurance and pensions. The Treaty of Detroit, as it became known, soon served as a national model. Within 15 years (as one learns in Matt Stoller\u2019s Goliath<\/em>, another excellent new book on the history of corporations), the percentage of Americans with surgical coverage went from 36 to 72 percent, and the reasons for it were Berle\u2019s reasons. As he put it in a 1954 book, \u201cMid-twentieth-century capitalism has been given the power and the means of more or less planned economy, in which decisions are or at least can be taken in the light of their probable effect on the whole community.\u201d<\/p>\n

And why not? Blue-chip, market-defining firms were stable, perennially profitable, and practically impervious to economic downturns and so could afford to spread the wealth around. Without imperious oligarchs watching their every move or imperious shareholders threatening to pull out if eye-popping returns weren\u2019t posted every quarter, managers could afford to think of the long-term well-being of everyone. It wasn\u2019t their money, after all, and the agency of shareholders was so limited as to make opposition nearly inconceivable.<\/p>\n

Examining this period, Lemann shows that the situation described above did not exist only because owners were so numerous and dispersed. Another product of Berle\u2019s influence had made Wall Street finance decorous and staid: the passage of the Glass-Steagall Act in 1933, which barred commercial banks from underwriting or dealing in securities and so greatly reined in the sort of dangerous, hyperleveraged speculation that caused the financial system to crash in 1929. Now a small set of regulated investment firms handled the nation\u2019s stock and bond offerings (Morgan Stanley, which broke off from J.P. Morgan for this very purpose, handled 25 percent alone by 1936), and American finance became a far more stable part of the US economy, almost more feudal than capitalist. This was partly for purely cultural reasons. It was the sole preserve of starchy old WASPs.<\/p>\n

When a firm like General Motors required a chunk of outside capital (which was rare), a GM executive or two\u2014relatively low-level ones\u2014would meet with a Morgan Stanley partner, who would then convene the other partners and decide how to raise it: stocks or bonds? How many shares? How much per share? There was no competition; \u201cno other banking firm,\u201d Lemann explains, \u201ccould try to become the underwriter of that issue because the SEC could review only one firm\u2019s request at a time.\u201d Then they would decide, also unilaterally, which of the lesser firms would get to sell it and how much of the profit would trickle down to these syndicate partners, and the availability of the new stock or bond would be announced in a stark, simple display ad in The Wall Street Journal<\/em> called a tombstone, which was often enclosed and put on one\u2019s desk as a souvenir.<\/p>\n

What might these days take place in seconds took weeks. The lower-level firms would then approach their clients, say a trust officer in Kansas City, who might buy a chunk \u201cto hold on to it for a wealthy widow.\u201d The widow might shake her fist, reading in the morning paper about how the execs at GM were surrendering their corporate liberty to that damned socialist Walter Reuther, but what could she do? \u201cOwners\u201d had no power\u2014and the system wasn\u2019t about to change to accommodate competitors who might devise faster and more flexible ways to move cash around and keep its recipients accountable. In 1947 the US government tried to sue Morgan Stanley as a trust, the judge in the case, after seven years of deliberations, declined to label it thus, ruling that the system worked perfectly well for all concerned and noting the \u201cabsolute integrity\u201d of Harold Stanley, one of the firm\u2019s founders.<\/p>\n

C<\/span>orporate finance is rather different now. Turn on your TV, and one fictional corporation\u2019s struggle not to be devoured by investors fuels enough cliffhanging melodrama to plot a soap opera. In one episode of HBO\u2019s Succession<\/em>, an executive addresses the employees of a hot website that his conglomerate purchased to signal to stockholders its hipness; he fires the entire staff to prove its ruthlessness. Not exactly the sort of capitalism in which decisions are taken in light of their probable effect on the whole community. In another episode, a young executive proudly announces a management efficiency he\u2019s been able to realize. (He has stock options to worry about, after all.) \u201cHow many skulls?\u201d his supervisor asks lustily.<\/p>\n

How did the one regime transform into the other? As a quibbling historian, I sometimes find Lemann\u2019s approach to the answer unsatisfying. In the manner of too many intellectuals, he privileges the role of intellectuals. He also gets the periodization wrong, granting great motive force to an academic paper published in 1976, even though the new phase of financialization was well underway in the previous decade. (Just read Stoller\u2019s account of the financial chicanery that brought down Penn Central railroad in 1970.) And Lemann also prefers to focus on the personalities implementing these changes instead of the structural forces behind them. These include the decline of American corporate profitability, the way formerly colonized nations began withholding access to their resources until their demands for political consideration were met, and the rising industrial strength of Europe and Japan as they rebuilt from the ruins of World War II.<\/p>\n

But the story Lemann does tell in this part of the book is so revelatory that I\u2019m glad to put such pedantic concerns aside. He introduces us to the anti-Berle: Michael Jensen, the kind of University of Chicago\u2013trained economist who insists that markets are the only fair way to apportion value in a society because they are the only institutions that are rational. Lemann illustrates the peculiar lunacy of this doctrine by relating how the psychologist Amos Tversky once asked Jensen to \u201cassess the decision-making capabilities of his wife.\u201d Jensen responded by contemptuously citing a series of economically irrational absurdities she indulged in. Then Tversky asked Jensen about his students,<\/p>\n

and Mike rattled off silly mistakes they made\u2026. As more wine was consumed, [Jensen\u2019s] stories got better, [and] Amos went in for the kill. \u201cMike,\u201d he said, \u201cyou seem to think that virtually everyone you know is incapable of correctly making even the simplest of economic decisions, but then you assume that all the agents in your models are geniuses. What gives?\u201d Jensen was unfazed. \u201cAmos, you just don\u2019t understand.\u201d<\/p><\/blockquote>\n

Behavior like this is why Jensen has had two wives and became estranged from his father and daughters. It also illustrates the sort of errant confidence that he and a generation of financial economists brought to arguments about funding corporations that eventually proved instrumental in so destabilizing the economy.<\/p>\n

One of Jensen\u2019s major influences was the free-market economist Henry Manne, whose most famous book, Insider Trading and the Stock Market<\/em> (1966), contended that trading on nonpublic information\u2014a crime\u2014was economically efficient and so should not be illegal. The argument by Manne that Jensen seized on and pushed to its furthest extreme was that stockholders should be granted power to enforce on corporate managers the understanding that their very existence depended only<\/em> on maximizing profits for stockholders. To encourage them to behave as full-time profit maximizers and nothing but, companies should take on much more debt. They should, in other words, be much, much more unstable, for well-funded corporate treasuries \u201cpermitted chief executives to relax,\u201d Lemann writes, \u201crather than being incessantly, almost desperately worried, as they should be, about making the company more profitable.\u201d<\/p>\n

Jensen\u2019s most influential statement of this idea was a 1976 paper, \u201cTheory of the Firm.\u201d Lemann describes it as \u201clong, detailed, [and] formula-filled,\u201d which gave it the appropriately cool aura of science, even if it was also a work of moral dementia. CEOs, the paper argued, were wasting far too many corporate resources on things like \u201cthe physical appointments of the office,\u201d \u201cthe attractiveness of the secretarial staff,\u201d and \u201cpersonal relations (\u2018love,\u2019 \u2018respect,\u2019 etc.) with employees,\u201d all mere distractions from the only value that mattered. \u201cLove,\u201d \u201crespect\u201d\u2014no wonder, you imagine Jensen tut-tutting, these irresponsible fools thought twice about decimating entire towns rather than just doing their jobs maximizing shareholder value.<\/p>\n

But Lemann overstates the responsibility of Jensen and his colleagues in the changes that took place in the 1970s and \u201980s. When corporate managers increased the number of workers illegally fired for union activity, from 3,779 in 1970 to 8,529 in 1980, their attention to articles in the Journal of Financial Economics<\/em> likely had nothing do with it. But Lemann isn\u2019t wrong in asserting that the \u201cnew financial economics\u201d that Jensen and his peers helped launch undeniably contributed to it. They not only provided the intellectual justification for things like paying corporate officials in stock but also invented the sophisticated mathematics behind index funds that tracked the entire stock market, making it much easier to create a mass market for stocks and bonds, and greatly increased the number of people who had a stake in bigger corporate profits. And they innovated fancy computer-driven financial instruments that left the somnolent olden days in the dust. Just as Jensen wished, corporations learned to abjure stability and love exotic forms of debt, and the companies that sold debt\u2014like Morgan Stanley, whose staff ballooned from 2,600 to over 60,000 between 1983 and 2018\u2014rose to the occasion, providing ever more innovative ways to supply it (even as a skeptic of these developments, then\u2013Federal Reserve chair Paul Volcker, huffed in 2009 that there hadn\u2019t been a useful financial innovation since the automated teller machine).<\/p>\n

Lemann does a very nice job explaining many of these baffling innovations, taking us again inside Morgan Stanley\u2019s offices to meet the men and now, mirabile dictu, the women at the controls. But he best illustrates the cult of instability behind these changes with a story. A top Morgan executive (an enlightened one, as it were: \u201che demonstrated his commitment to the advent of diversity at Morgan Stanley by offering free golf lessons to women and minority employees\u201d) was rewarded, after a particularly lucrative transaction, with \u201ca smashed telephone headset, of the kind an amped-up trader might create in the heat of a big trade, encased in Lucite as a parody of the old tombstone-ad souvenirs.\u201d<\/p>\n

This could not have happened without the dismantling of the regulatory regime that Berle and other New Dealers put in place in the 1930s\u2014laws like Glass-Steagall, which Clinton signed out of existence with the announcement that \u201cthis is a very good day for the United States.\u201d Its repeal opened a Pandora\u2019s box, returning America to the pre\u2013New Deal days when corporate finance was characterized, as one of Berle\u2019s mentors put it, by \u201cprestidigitation, double shuffling, honey-fugling, hornswoggling, and skullduggery.\u201d The difference is that our new age of prestidigitation and honey-fugling was intellectually underwritten by a set of doctors of economic philosophy who managed to convince a generation of Democrats that all of this was not just lucrative but also progressive. The flow of dollars, they explained, was really the most democratic way to judge what was worthwhile in society. If dollars kept flowing toward something, that something must be worthwhile in and of itself, and if that something was an exotic financial instrument, its riskiness need not be of much concern because the risk was already priced into it\u2014making it that much harder for them to anticipate the sort of cascading, system-destroying failure that happens when, as history shows they eventually always do, highly leveraged financial instruments fail.<\/p>\n

Nowhere is Lemann more enraging than in his description of what he found deep in the bowels of the William Clinton Presidential Library. One example: an eye-opening memo from junior staffers at the Council of Economic Advisers, who were astonished by an Office of Management and Budget report that concluded banking regulation had \u201ccost\u201d the United States roughly $5 billion. \u201cNo attempt is made in the report or in the studies it cites to estimate the benefits of regulation of financial markets,\u201d the memo states. Another memo recorded what happened after Brooksley Born, then the head of the Commodity Futures Trading Commission, exercised her jurisdiction to regulate the new $28 trillion market in derivatives (another invention of Jensen\u2019s colleagues in the field of financial economics). She pointed out that if the assets these derivatives were built on were not accurately priced (for example, dodgy home mortgages), the whole financial system could be destabilized. But she simply didn\u2019t understand, then\u2013Federal Reserve chairman Alan Greenspan explained: \u201cEconomics should inform these decisions.\u201d Treasury Secretary Rubin was recorded complaining that the \u201cfinancial community\u201d was \u201cpetrified\u201d and that he would simply proceed as if she didn\u2019t have the jurisdiction she claimed. His colleague Larry Summers followed up with a phone call to Born threatening that \u201cif she moved forward\u2026she would be precipitating the worst financial crisis since the end of the Second World War.\u201d<\/p>\n

L<\/span>emann grounds the consequences of all these high-flying transformations in the experience of a single Chicago neighborhood known as Chicago Lawn. This was where Martin Luther King Jr. was struck by a rock when he led marches for open housing in 1966. Subsequently, in Lemann\u2019s telling, Chicago Lawn settled into a humble but stable existence as a mixed-ethnicity neighborhood that one of his guides, the former owner of a Buick dealership, remembers as being an \u201cEden\u201d\u2014but one that, in the wake of all this new financial prestidigitation, suffered decades of deindustrialization.<\/p>\n

Was Chicago Lawn ever an Eden? Surely not; nostalgia is a kindness we overlay on a complicated past. But it\u2019s hard not to be impressed by the scene that Lemann paints of one of its institutions, Talman S&L, a \u201cgrand block-long building at Fifty-Fifth and Kedzie that was the largest savings and loan office in the country,\u201d on Friday nights. Payday was almost a party, a hive of convivial conversations carried out on couches that the owner provided for the occasion. Sometimes he even hired a band. Institutions like Talman filled out a virtuous cycle: Wages earned at the Chicago Lawn outposts of the great blue-chip corporations became savings; savings deposited at Talman were invested in mortgages, not dodgy financial instruments; and mortgages made for safe and stable neighborhoods that prospered and thrived. The reason this worked was government regulation\u2014including one in Illinois that barred financial institutions from operating in more than one location in the state. This meant that banks served their communities, not transnational circuits of hot money.<\/p>\n

Then what became of Chicago Lawn? Imagine Berle\u2019s horse, boiled for glue. \u201cThe market for corporate control that Michael Jensen had promoted so enthusiastically affected all the major private employers in the neighborhood, always in the same way: fewer jobs.\u201d An American Can Company factory, a Kool-Aid plant, one that manufactured water heaters, a Sears branch, a Nabisco cookie plant \u201cwhose towering factory on South Kedzie was a neighborhood landmark and the largest private employer\u201d\u2014all were victims of the age of transaction.<\/p>\n

The Buick dealership, which boasted \u201can overwhelmingly black clientele, a black manager, and a union shop with lots of black employees,\u201d survived for a time; the owner adjusted to the neighborhood\u2019s straitened circumstances by selling more used cars and by putting up a basketball hoop for kids in the neighborhood. Then GM nearly went under, a victim of the credit crunch after the 2008 crash\u2014and the fact that it had turned itself into one more company that relied for its health on selling debt. The Obama administration\u2019s auto bailout was devised by financier Steve Rattner, who demanded the shuttering, without warning, of hundreds of dealerships around the country. Yet the owners of those dealerships successfully petitioned their congressional representatives for a reprieve, much to Rattner\u2019s astonishment. Figures on a balance sheet aren\u2019t supposed to talk back, and to see Congress pay so much attention to their pleas left him, as he noted in his autobiography, \u201cmystified.\u201d But the Chicago Lawn Buick dealership went under anyway, largely, it seems, because GM loaded it down with so many financial obligations (for example, demanding a redesign and renovation of the dealership by a GM-approved architect). So that was that. The neighborhood institution is now a Wendy\u2019s, after years as a vacant lot.<\/p>\n

The most moving parts of Transaction Man<\/em> take us inside the struggles of Chicago Lawn\u2019s priests, community organizers, and ordinary neighbors to manage the wreckage. Many of them not infrequently become wrecks themselves. Earl Johnson, the \u201cunofficial mayor of the 6300 block of South Rockwell,\u201d was almost arrested by cops demanding to know why he was sitting in his car. \u201cBefore it all died down, the police had beaten up Earl\u2019s brother.\u201d In another case, he was sitting in his backyard with neighbors when they were set upon by an armed young marauder, whom Earl attempted to subdue. In the midst of that, \u201cone of the boy\u2019s friends came up, plucked out the gun, and shot Earl in the back. \u201cBetween the gangs and the police,\u201d he had finally had enough. He moved to a small town in Indiana and got a job at a plant that happened to produce police cars.<\/p>\n

Jensen also undergoes a transition in the period covered by the book, although it\u2019s almost too absurd to believe. After the economy collapsed in 2008 for many of the same reasons it did in 1929 (unregulated, hyperleveraged hornswoggling), he revisited his earlier academic work and decided that the only reason his theories didn\u2019t work was that economic actors had not yet learned to act rationally. To remedy this, they must study, as Jensen now does with frantic devotion, the ideas of Werner Erhard, the founder of a 1970s self-help cult. If enough people internalized Erhard\u2019s ideas\u2014taught in seminars with titles like Being a Leader and the Effective Exercise of Leadership: An Ontological\/Phenomenological Model\u2014then, as Lemann paraphrases his subject, there would be \u201ca benign revolution in human affairs\u201d and \u201csoon people would prove, with rigorous, quantitative research, that companies adhering to [Jensen\u2019s] idea of integrity performed far better economically than companies that did not. That this had not happened yet did not affect his certitude.\u201d<\/p>\n

Reading about Jensen moving around the globe preaching New Age babble in order to redeem the failings of another set of fraudsters his ideas helped enable in the first place, it\u2019s hard to discern what is goofier: that or the ideas that made him one of the most influential economists on planet Earth.<\/p>\n

T<\/span>ransaction Man<\/em> has a final profile, of Reid Hoffman, the founder of the job seeker\u2019s social network LinkedIn. This profile is incredibly illuminating. Better than I ever did before, I now understand how closely the Silicon Valley business model, whose architects somehow believe themselves to be leading us to a New Jerusalem, resembles what is politely referred to as multilevel marketing or, to put it more bluntly, a pyramid scheme. In this new iteration of corporate finance, investors shovel money to disrupters in fantastical amounts, even though the vast majority of them will fail. One study Lemann cites found that among venture capital recipients (who constitute the cream of the crop, since the vast majority of supplicants receive no funding), three-quarters will fail.<\/p>\n

The only possible way such investing could make sense is if the venture capitalists are placing bets that they will someday buy into a monopoly; indeed, it is only at a monopoly-like scale of market domination that a social network company can hope to make money at all. So we\u2019re back where we started: aggregations of capital in the hands of a few individuals and corporations controlling, for their profit and exclusive advantage, the sale of certain necessities of life\u2014in this case, our social relationships, the ties that bind, the very stuff of psychic life itself.<\/p>\n

Meanwhile, the material world grinds on. In destitute Chicago neighborhoods, social media has become one more factor in the world Polanyi warned we might get if society failed to restrain the destructive forces of the market and profit maximization. Two sample headlines: \u201cFatal Chicago Shooting Captured on Facebook Live\u201d and \u201cChicago \u2018Gang Member\u2019 Streams His Own Shooting Death.\u201d But after telling Hoffman\u2019s story, the book does not take us back to Chicago Lawn. Instead, Transaction Man<\/em> peters out with one of those short How to Solve It All chapters that publishers love to insist must be tacked onto books about social problems.<\/p>\n

Perhaps the reason for this is that Lemann ran out of pages or, possibly, time. If so, it\u2019s a bad break, because this summer, as his book went to press, history provided him the material for another, more interesting conclusion. The Business Roundtable, an organization founded in 1972 whose membership consists solely of the chief executive officers of some 200 of America\u2019s biggest corporations (including Citigroup, where Robert Rubin went to work after his government service), announced that it was \u201cmodernizing its principles on the role of a corporation.\u201d A press release noted that since 1997, each of the Roundtable\u2019s periodic statements on the principles of corporate governance had insisted \u201cthat corporations exist principally to serve shareholders.\u201d That, the Roundtable now claims, \u201cdoes not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.\u201d<\/p>\n

This new manifesto pledged the group to work toward an \u201ceconomy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.\u201d The bullet points enumerate the many goals that the signatories are committed to, such as \u201cdelivering value to our customers,\u201d \u201cinvesting in our employees,\u201d \u201cdealing fairly and ethically with our suppliers,\u201d \u201csupporting the communities in which we work,\u201d and\u2014last and (we are very much meant to assume) least\u2014\u201dgenerating long-term value for our shareholders.\u201d<\/p>\n

Somewhere, Milton Friedman must be weeping. The Wall Street Journal<\/em> certainly is: \u201cThese CEOs are fooling themselves if they think this new rhetoric will buy off [Elizabeth] Warren and the socialist left,\u201d its editorialists replied. \u201cIt may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient.\u201d Whether the Business Roundtable can be trusted in these representations is, of course, the most open of questions. But in the meantime, I can\u2019t imagine a better way to grasp the immense difficulties that will be involved in any thoroughgoing revision of the purpose of corporations than by reading this book.<\/p>\n<\/div>\n<\/section>\n

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